Looking Back on HAMP and Forward on Student Loan Relief

Congress should soon take a look at fastest growing category of consumer debt—student loans. During the 2016 Presidential election, Donald Trump added his voice to the Democratic law makers, led by Senator Elizabeth Warren, calling for student loan relief. President Trump was elected on the promise of quick action for hard working Americans. Here’s why student loan relief is a good place for the Republican Congress to start. And why it’s important that Republican student loan relief avoid the mistakes the Obama Administration made with HAMP.

Student Loan Debt is a Job Killer

Student loan relief is one way President Trump and the Republican Congress can deliver on their promise of faster economic growth.Forty three million Americans have student loans. One third of those, fourteen million Americans, have student loans greater than $25,000.00.

Fourteen million Americans have more than $25,000 in student loans. That holds down economic growth for all of us.

One cause of the slow recovery from the recession—which was a major factor in Hillary Clinton’s defeat—is student loan debt. This article from Business Insider explains. Student loans are “having a crippling effect on economic activity, says Barbara O’Neill, a specialist in financial resource management for Rutgers University.”

Here’s one example of how that works. A debt free college graduate can expect to save enough money to be a home owner five years after graduation. With $28,950.00 it takes ten years. And 13 years for people with $50,000.00 in student loans. That’s fewer jobs in construction and in manufacturing household appliances and furniture. It puts off the age when young people get married and start a family. And it makes it harder for young families to start college savings for the next generation.

So What Does Student Loan Relief Have to Do With HAMP?

January 1 2017 marks the end of President Obama’s Home Affordable Modification Program (HAMP). The Obama Administration hoped that HAMP would help three to four million people save their homes. It reached far less than half of that. My own clients, like the people in this news article, reported constant frustration in applying for the program and lost paperwork the banks. However, the banks “will continue to receive billions in incentive payments for helping borrowers who signed up for HAMP for seven years.”

No wonder commentators have said that HAMP was designed to help the bankers, not the home owners.

HAMP was a Political Disaster

HAMP failed the Obama Administration as badly as it failed the home owners. As early as January 2010, the New York Times warned President Obama that the lack of “serious relief for homeowners” was damaging the Democratic party politically. Voters watched while “the federal government rescued banks, financial firms and auto companies, but they themselves feel adrift, still awaiting the kind of decisive leadership on jobs and housing — in terms of both style and substance — that Mr. Obama promised in 2008.”

The Administration failed to heed the warnings of its media supporters. The political damage caused by HAMP continued the present.

The decision to protect banks over homeowners was debilitating. A tide of cynicism swept out Democrats in the last…elections, with voters more skeptical than ever that government can solve problems, or take the people’s side over the financiers. Two-thirds of voters in exit polls found the economy to be rigged for the wealthy.

“The consequence of these decisions was the disillusionment of his base in believing that political action is going to work,” says Damon Silvers. “They weakened the Obama presidency in ways he could never recover from.”

That prediction that the Obama presidency would never recover from the damage caused by the HAMP Program was written February 2015. It was born out by the collapse of the Obama coalition and the defeat of Hillary Clinton in 2016.

No Bureaucratic Program Please!

Republicans could have predicted that HAMP would fail. In fact, they did, as early as 2011.

“To many struggling Americans seeking permanent mortgage relief, HAMP offered little more than false hope. More homeowners have been kicked out of the program than have received permanent relief,” Rep. Darrell Issa, the California Republican who chairs the House Oversight Committee, said in a statement.

HAMP was a complex government program. As Republicans are quick to point out, complex government programs often don’t work as promised. You can look at this 255 page instruction manual, written by Fannie Mae, and see why: bureaucracy “in action.”

Rather than a new program, there’s a simple change in the law that will work wonders. Less than twenty years ago (before 1998), hard pressed consumers could discharge their student loans in bankruptcy, as long as the student loan had been in payment status for seven years.

Before 1976, student loans were dischargable in bankruptcy the same as any other debt. The special status of student loans is a recent change in the law. It can easily be corrected.

What’s Wrong With Just Expanding the Obama Public Service Loan Forgiveness

Congress authorized, and the Obama Administration implemented, a program for forgiveness of Federal student loans for people working in “public service” who make 120 monthly payments (10 years worth). Rep. Karen Barr (D-CA-37) introduced a bill, HR 5487, that would remove the “public service”requirement—making student loan relief possible for people working in the private sector.

(The “pubic service” requirement essentially discriminates in favor of government employees, who are probably not underpaid. But expanding a failing program is not the best way to do that.)

Like the HAMP program, the PSFL is set up by Federal regulations which the private loan servicer is required to follow in dealing with the consumer. Little wonder that only a tiny fraction of those eligible have signed up. (Only 295,000 people, according to one estimate, out of 43 million student loan debtors, one quarter of whom may be eligible for PSLF. A participation rate of 2%.)

Like its bigger cousin HAMP, PSFL has become the subject of litigation in court, for unfair rulings on what is and isn’t “public service.”

None of the websites describing this program give credit to George Bush, who signed it into law. Nor are any of the handful of people who might be finishing the ten year commitment likely to remember him.

The promise of student loan relief ten years down the road does nothing to provide economic growth now. As long as that student loan debt sits on a consumer’s credit report, it weighs down the consumer’s debt to income ratio, making it harder for that consumer to buy a home, start a family and save for the future.

For those who need it, Bankruptcy Provides Student Loan Relief Now

In 2005, Congress enacted more stringent tests to discourage unnecessary bankruptcy filings. Bankruptcy filings are at a historic low, with only 30 people per 1000 filing bankruptcy annually. Restoring the pre-1998 legal status of student loans in bankruptcy, Congress can provide immediate student loan relief to borrowers who need it—with safeguards already in place to prevent abuse. Economic activity will increase, as more young families are able to buy homes.

This approach implements the commitment of the Trump Administration to change with immediate impact and no bureaucracy.

Can I Cancel the Homeowners Insurance—I’m Moving Out

Are you giving up your house as part of your bankruptcy? If you are, can you cancel the homeowners insurance?

I say, No. You homeowners insurance does two big things. First, it would pay to rebuild your house after a fire. If you’re giving the house back to the bank, maybe you don’t care about that. (Maybe you do.) Second, it protects you against liability for accidents on your property. That’s still important. In fact, if you are moving out it might be even more important.

Your homeowners insurance protects you from liability for accidents on your property. So don’t cancel the homeowners insurance.

Until there’s an actual foreclosure, the property owner—that’s you—can be liable for accidents caused by unsafe conditions on the property. Most obviously something like dangerous ice on your sidewalk. But maybe an abandoned refrigerator. All those dangers are small, but they can add up.

Isn’t the bank the owner once I move out?

No, the bank does not become the owner until there is an actual foreclosure. If you’ve stopped paying and filed bankruptcy, that can be as little as three months, but usually four or five and sometimes much longer. I explain a little more about that, here.

So if you are asking me is it safe to cancel the homeowners insurance, when you move out, my answer is, No.

A real example: Rainstorm and falling tree.

Dan and Stephanie filed Chapter 7 bankruptcy with me in the Spring of 2016. A year later, the bank still had not foreclosed on a small rental property they had in Ohio. The next month, a tree from their property, during an unusual storm, fell on their neighbors’ house and car. Now the neighbors can look to their insurance to get the house and car fixed. But that insurance company will want to show that it wasn’t just an accident—that Dan and Stephanie are responsible for not taking proper care of the trees. That’s why it’s even more important, if the property is vacant, to keep up the insurance.

Legal Alliance, PLLC—Warning Signs of a Stop Foreclosure Scam.

Two people, just this week, brought me letters they got from an outfit calling itself Legal Alliance, PLLC. (One of the two had paid them $2500.)

This letter is chock full of the warning signs of a scam.

First page of the Legal Alliance, PLLC letter claims they have “experienced real estate attorneys” but they never give you their names. Odd? A warning sign of a scam.

1. Claiming to be lawyers but no lawyer names.

Most lawyers love to put their names on stuff. (I can say that, since I’m a lawyer. And i put my name everywhere.) This Legal Alliance, PLLC has no names of any actual lawyers. Why is that? Maybe the lawyer(s) behind it has a bad reputation. Maybe the lawyer(s) behind it has a good reputation that they don’t want mixed up with in something bad. Maybe they are unusually humble. Maybe.

2. Claiming to be lawyers but you don’t get to talk to a lawyer.

Here’s a quote from page three of the letter.

The client understands that he or she may be speaking with non-attorney staff member and that in that case all discussions are for general information and cannot be viewed or construed in any way to be legal advice. unless notified otherwise assume that you are speaking to a non-attorney.

The short version of that is, you can’t count on anything we say.

3. You promise not to sue.

This is even more spectacular.

The Client hereby agrees to indemnify, defend and hold harmless the Firm from and against any liability of any nature whatsoever arising out of, or in connection with this Agreement. In addition the client agrees to pay all the Firm’s legal costs associated with claims arising form this Agreement.

Legal Alliance, PLLC wants you agree you will never sue then—even if they take your fee and do nothing.

Even if they take your $2500 and do absolutely nothing—and then lie about what they haven’t done—you aren’t allowed to sue them. And you agree with you sue them anyway, Legal Alliance, PLLC can sue you.

Among other things, that provision is a legal ethics violation, in Virginia and many other states. Why would you trust someone who wanted you to sign that?

4. False claims?

Having warned you that you can’t count on their promises, what does Legal Alliance, PLLC tell you they will do? In big letters: STOP THE FORECLOSURE SALE UNTIL THE BANK HAS PROVIDED ALL REQUIRED DOCUMENTATION, WHICH THEY MAY NOT HAVE.

“May not have?” Well anything is possible. Just ask them, ‘can you give me the contact info on just two of your clients where you have successfully stopped the foreclosure. Just two.’ See what they say.

They double down on that promise: We ensure they have all of the required documentation. IN MOST CASES THEY DON’T.

That I know isn’t true. And over the years, out of more than 15,000 bankruptcy clients, I’ve seen three or four cases where the mortgage papers were messed up in some way that helped save someone’s home. But that’s less than one out of a thousand. No where near “most cases.”

5. Phony time lines and useless activity.

Here’s the specific thing Legal Alliance, PLLC promises to do. They promise to send a Qualified Written Request to the mortgage company that’s foreclosing you. Sounds good, why do I say it’s phony? Your mortgage company has thirty business days—that’s six weeks, or more if there’s a holiday in there—to answer that Qualified Written Request. But, they send their letter out thirty calendar days before the foreclosure sale is set. In other words, by the time they get the documents which are supposedly gonna stop the foreclosure, they are two weeks too late.

So, they never give you any legal advice, send one letter, get no information in time to do anything to stop the foreclosure, and then? Sometimes they send you to a bankruptcy lawyer, where you should have gone to begin with. And your $2500 is down the drain.

Why do People Fall for Scams?

The purpose of bankrutpcy is to help you. But bankruptcy requires complicated, annoying paper work and it can be expensive. (In some cases I’m charging less than $2500; some cases a lot more. It depends on how complicated your situation is, and what you are trying to do.)

Some people don’t want to take the time and spend the money to get a law and a lawyer on your side. So they fall for simpler, cheaper scams.